ALTERNATIVE STRATEGIES 1996

JOEL ELSON

News & Solutions Category Management Report

American consumers have never before enjoyed so many retail options when it comes to purchasing both food and nonfood.

This is perhaps the most important critical issue facing nonfood executives in the grocery trade today where food, the supermarket's core business, as well as nonfood have suffered by the strategies employed by alternative formats.

"Competition will stay strong, especially with Kmart and Wal-Mart getting into grocery," said Carol Isacson, director of nonfood at Plumb's, Muskegon, Mich. "Gasoline stations with mini-mart outlets are also booming everywhere

and opening new locations. They carry groceries and other products that we find impacts our business both in terms of food and nonfood."

For this reason, many grocery chains are reassessing their nonfood departments, with many making a greater commitment to the categories.

"Most food chains now are fighting to keep nonfood as a core business. Many are giving general merchandise and health and beauty care sections core treatment with larger footage, forceful pricing and featured items in ads that draw shoppers into stores," said Charles Yahn, vice president of general merchandise at Associated Wholesalers, York, Pa.

Nonfood has become essential in maintaining and building a strong customer following amid the fierce competition by alternative channels that sell everything and much of it at low prices.

"Everybody is fighting for market share, and they [various competing formats] kick the items they feel can increase their market share. They knock the hell out of the pricing," said Carl Lang, general merchandise buyer at John C. Groub Co., Seymour, Ind.

Grocery retailers who are serious about competing know that in today's retail environment, nonfood can no longer be sold as just a convenience item, and its significance as a profit builder is not as strong as it used to be.

"While there are still some fairly decent margins in some general merchandise, such as hardware and batteries, I expect them to tighten up. The mass discounters have driven all the profit out of some categories like lighting," said Dan Willows, category manager for general merchandise at Associated Grocers, Seattle.

"In the past, consumers would buy a nonfood item out of convenience regardless of the price. This has changed," said Randall King, nonfood buyer at Byrd Food Stores, Burlington, N.C.

"Consumers today are smarter and know what items cost. If there's a 20-cent difference on a $5 item, they'll pick it up rather than drive somewhere else. But if it's a several-dollar difference, they won't buy it," he added.

In most nonfood categories so far, supermarkets have been losing the battle to capture consumer dollars. The latest consumer survey conducted for SN by America's Research Group, Charleston, S.C., indicates a drop in the number of consumers who shopped for HBC in supermarkets over the past year.

The survey results, however, were slightly more encouraging when it came to general merchandise. Although about the same number of consumers as last year said they planned to buy more general merchandise at supermarkets, there were more consumers this year who said they expected to buy more general merchandise at supermarkets in the future. (See Page 140 for results of the survey.) While it's clear that mass merchandisers continue to capture large amounts of nonfood dollars at double-digit rates, supermarkets have managed to hold on to their HBC share at least over the last year, according to InfoScan statistics compiled by Information Resources Inc., Chicago.

For the 12-month period ended Dec. 31, 1995, supermarkets gained 1.5%, or a 32.4% share, of the total $41.1 billion in HBC retail sales in mass channels. Drug stores stayed even with a slight 0.3% gain, or a 37.7% share. Mass merchandisers posted a healthy 12% gain, or a 29.9% share Other critical issues impacting nonfood, according to retailers and wholesalers interviewed by SN, include allocating space for nonfood, changing consumers' perceptions of nonfood merchandising at supermarkets, distribution, new products and special packs.

Here's what retailers and wholesalers had to say:

Charles Yahn

VP, general merchandise

Associated Wholesalers

York, Pa.

New prescription to over-the-counter switches will be a major issue and have the most impact. New remedies for smokers in a patch and gum, Rogaine in hair care and Femstat 3 in feminine hygiene are all high-priced items, and involve a lot of investment and shelf space.

And with Zantac coming, these new items will impact HBC more than anything else we do. In terms of shelf space, it will be a big issue.

Vitamins and skin care will continue to grow along with the aging population. Herbals and supplements will continue to build. You'll see expanding space for these items.

Competition also is a major issue for the food channel. Retailers need to combat this with more space to nonfood, more pharmacies, and more attention to the categories.

Another constant challenge is trying to keep the playing field level. In spite of suppliers contending they don't offer Wal-Mart anything that they don't' offer you, you'll go into a Wal-Mart and half of their special items are special packs. They won't offer them anything they won't offer you, but they will make special packs for them.

Nonfood will carry a better margin than the rest of the store, but it won't be at the levels of the past. Retailers must very definitely work on realistic profit margins if they want to be competitive, not be a convenience store.

Most food chains now are fighting to keep nonfood as a core business. Many are giving general merchandise and health and beauty care sections core treatment with larger footage, forceful pricing and featured items in ads that draw shoppers into stores.

The industry is not there yet with enough seasonal display space, but truthfully I don't think we ever will. We have the space dedicated to everyday nonfood sections. Seasonal remains the weak link, in spite of it pumping up a lot of extra dollars. The industry still needs to develop destination nonfood departments instead of being a fill-in store for many nonfood areas.

John Susich

VP, general merchandise

Hy Vee Inc.

West Des Moines, Iowa

There are a broad range of critical issues from space constraints for nonfood displays to competition from discounters and mass merchandisers to the pricing of seasonal goods.

Nonfood is still evolving in the grocery industry. Issues like knowing how to price nonfood, knowing your competitor, procuring products and the attention given at store level are all important.

Nonfood procurement is unlike grocery, which is usually all warehoused in one location. You can go to a grocery warehouse and get all the particular items. With nonfood there are many more vendors involved and no one good source for all products in a single warehouse.

Nonfood is usually sourced from many suppliers and comes in all manner of shipping sizes and shapes. Many products lack uniformity and are in different quality levels and pricing. You need to see, feel and touch the product. It presents a constant challenge to buyers.

Placing orders on the telephone for many general merchandise items also is difficult. With Rocky Mountain Colorado 202 canned peaches, for example, I don't need to see the peaches. But if you call me up with a wooden gizmo, I need to see it, research it, to find out what kind of price should be on it. We have to know if it will relate to our different customer audiences. With peaches, on the other hand, I would know 59 cents or something like that would be a heck of a deal.

Unlike other areas of the store, you're facing a whole series of new items, packaging and new entries in the marketplace in nonfood every year. In produce, lettuce is lettuce and it's the same as it was 10 years ago.

To compete against other formats, the food channel needs to reverse many years of trends and retailer attitudes. Until the last few years, most general merchandise and HBC were at very high margins. No one paid any attention to retail pricing unless you looked at another grocer. It wasn't an issue until you started to ask who is your real competition for nonfood.

We must reverse past trends. Retailers must create the perception that they are this business, and they want to be in it.

They must offer many special and bonus packs found at mass merchandisers. We continually hear from HBC providers that grocery stores are reluctant to take this product because it doesn't fit on the shelf. Yet the mass merchandiser begs for it and will go out with shippers stacked up all over the store.

We have to get out of that mentality that a particular item will always come in that exact same size to fit on the existing shelf.

The way we approach the business has to change. It has to be in the manner of those people that are very successful. We need to exit the traditional role of just being a grocery store.

Kmart and Wal-Mart often will use these unusual pack sizes to excess. But a lot of nonfood business is based on image, and a cardboard shipper creates the perception that you're really in this nonfood business.

Everybody is looking for another successful holiday Barbie or Cabbage Patch doll, but that's like looking for home runs when what you really need to do is hit a lot of singles with the basics.

Dan Willows

category manager, general merchandise

Associated Grocers

Seattle

The most important issue is the efficient handling of nonfood goods. Everybody is streamlining and there is more regionalizing. It's a matter of trying to compete with chains doing that.

Some large chains like Safeway are regionalizing into a hub distribution center for shipping to further points. As a wholesaler we need to handle goods more efficiently and get into some kind of regional hub concept as a central draw in a streamlined operation, with not as much overhead.

In our company we have one warehouse and need to figure how to become more efficient with other independent wholesalers. Independent wholesalers with their own warehouse must do what the chains have done. If they are unable to consolidate their warehouses, they could at least make big buys together.

With some nonfood categories eroding to other retailing formats, the food channel needs to make sure they have the right promotions and are promoting the package the customer wants. The challenge is trying to figure out ways to get manufacturers to partner with us to drive those big packs that mass merchandisers and large warehouse outlets carry.

They offer large five-packs of film, large packs of Maxi Pads and battery packs sold at hot prices, which keep consumers out of the market for a long time. We need to figure out how to promote those large packs to our customers, too.

We have to compete on cost with those discounters and mass merchants and on price, too. You just need to get into the head of the manufacturer and learn how to drive the cost of goods down lower.

One way would be buying full pallets of large film packs or blank videotapes, and breaking them down into smaller quarter pallets for individual stores.

Given the stiff price competition in the market, the previous high margins in HBC are pretty much gone. With Wal-Mart, those margins are tightening up as the mass merchandisers and discounters move in.

While there are still some fairly decent margins in some general merchandise such as hardware and batteries, I expect them to tighten up. The mass discounters have driven all the profit out of some categories like lighting.

We're seeing more retailers better understand the whole concept of nonfood and how it helps improve the store's gross profit mix. However, many retailers and wholesalers still have a grocery mentality. Many still view nonfood as a customer convenience, with no real understanding of what is involved in HBC and general merchandise.

Pharmacy is one of the hottest areas for supermarkets. Since we have customers in stores two and three times a week, it can add significantly to sales in HBC. Phone cards also are a big category. We have a private label card that's been out for six months and sales are doing well.

Frank Puleo

director, nonperishables

Genuardi's Family Markets

Norristown, Pa.

The competitive pressures are tough on supermarkets with so many classes of trade out there in nonfood. As a conventional operator, the biggest challenge is space. Our circumstances don't allow us to concentrate as much on nonfood as we do with fresh foods.

We dedicate space to seasonal and everyday nonfood, giving it more exposure. We recognize we need to pay more attention to nonfood as a core business. We're trying to emphasize nonfood and find better ways to develop and merchandise it for a better part of our overall mix.

At the same time, we can't lose sight of the fact that we're in the food business. Yet nonfood is absolutely a necessary part of our mix and we may give it more exposure.

We're evaluating the nonfood cutout in stores because there are still some opportunities in nonfood. If we can, we'll step up the pace a little to gain more sales, since nonfood is very profitable.

We're adding 20-foot to 80-foot seasonal sections at new stores and designating seasonal sections for promotions in existing stores. We've imported some products over the past few years from other sources, domestic and imports in seasonal.

Our direct seasonal nonfood purchases are up 20% over last year, and nonfood volume overall is increasing each year, with a lot of the growth from our direct purchases.

In spite of the competition in the marketplace, it's still possible to use nonfood as a margin builder. With good buying procedures and seasonal opportunities, you can carry lines that a lot of times competitors don't offer.

Gadgets or stick goods are a good example. A different line than your competitor can offer the same quality. There is really no valid comparison on pricing. You can get a little more profit from it or negotiate a stronger deal, and have even a cheaper retail than a competitor.

Randall King

nonfood buyer

Byrd Food Stores

Burlington, N.C.

With the continued expansion of killer category outlets and the growth of Wal-Mart, we're trying to create a low-price value image that is a critical challenge for supermarkets today.

Instead of trying to meet these competitors with low pricing on all nonfood, we're featuring a couple of items a week at hot retails with massive displays to change customer perceptions. We're presenting a value image for nonfood.

We're using real good buys on certain image items like Rubbermaid trash containers and stacking them high on pallets. We're pricing them as cheap or cheaper than the competition.

In the past, if you sold one or two at a high margin, you were happy. But now you try and cut margins and get it out there and get your turns.

If you buy a truckload or two of an item you can get a quantity break and at a lot cheaper than 20 cases. That's where the massive displays come in. Putting out a big display that you've purchased at a lower cost means it can be priced at a lower retail and you can move more of the product.

While nonfood used to be a good margin builder in the past, this is no longer the case due to the stiff competition from mass merchandisers. Nonfood margins are still higher than in grocery items, but you can't have them as high as the past because there are so many other places like Wal-Mart and Kmart to buy it. Some people shop at these mass merchandisers as often as at supermarkets.

This has forced the industry to take a more realistic approach in the way margins are set. In the past, consumers would buy a nonfood item out of convenience, regardless of the price. This has changed.

Consumers today are smarter and know what items cost. If there's a 20-cent difference on a $5 item, they'll pick it up rather than drive somewhere else. But if it's a several-dollar difference, they won't buy it.

Nonfood is becoming a core business in larger stores where there is enough space to create a destination department. We're trying to make a bigger impact and get suppliers to sell us product as cheap as they can.

Carol Isacson

director, nonfood

Plumb's

Muskegon, Mich.

Competition will stay strong, especially with Kmart and Wal-Mart getting into grocery. Gasoline stations with mini-mart outlets are also booming everywhere and opening new locations. They carry groceries and other products that we find impacts our business both in terms of food and nonfood.

Walgreens stores are also popping up everywhere. Other retailers that carry mainly apparel also are expanding into other lines that compete with supermarkets.

Food chains can no longer rely on traditionally higher nonfood margins in the face of the mass merchandisers that have gotten into food and groceries. They use food and nonfood as traffic builders and feature ad items at a lower cost that are hard for food chains to match.

They can run these weekly specials at or below cost because they sell a ton of general merchandise and they pick up the profit somewhere else. In a grocery store, you can't afford to do that.

Food chains need to keep getting the products out there, particularly a lot of general merchandise in-and-out promotions, set in a special aisle or in shippers with a lot of impulse items, to get shoppers' attention.

You can no longer rely on your regular line items alone as a strong nonfood draw. You need other products that distinguish your store from the competition.

But as a co-op member of Spartan Stores, I have other Spartan stores all around me running the same kind of items. This becomes a me-too situation that can be a problem when there are several stores in town pulling the same products from the same wholesaler.

But this can happen with any wholesaler. I purchased some items direct in inexpensive summer toys that Spartan wasn't able to get. I also bought some small picture frames and plastic items that we found at the housewares show in Chicago.

In spite of Spartan being a good warehouse, it's critical in nonfood to try and do more of your own thing. You have to discover new or different products to satisfy both your very faithful customers, plus you want to draw in as many new shoppers as possible with things they aren't seeing down the street.

Wholesalers can also do this, too, but you've got to start looking around to see what you can do to capture your own market.

Food chains I think look at nonfood with the kind of attitude that "we're here," but that's been a detriment over years. Grocery stores have become lazy and haven't emphasized those nonfood areas that they could have captured business in a long time ago.

Carl Lang

general merchandise buyer

John C. Groub Co.

Seymour, Ind.

The growth of supercenters is certainly a major concern industrywide. In our particular marketplace, we're faced with four right now and soon will have two new ones opening. It's a force that must be reckoned with. To capture nonfood sales from major competitors, we must focus on our strengths and their weaknesses. Our strengths are being a local store that knows the needs and wants of our community, and we merchandise our stores accordingly.

There are weaknesses in the supercenters in that regard, since for the most part they follow a corporate mandate. At Wal-Mart there is very little flexibility at the local level. The large supercenters have little leeway in merchandising, although they have in pricing. We have to address those issues and take advantage of them.

We deal through a nonfood supplier and also do some direct buying. We look to our suppliers of the world to keep us competitive in nonfood. There are no high margins in supermarket nonfood, and today we're looking at single-digit margins in nonfood.